The Seattle-based company said that it plans on using the money as a way to kickstart its business idea. CoinLab wants to use the bitcoin mining system as a means to generate revenue primarily for gaming companies.

Here’s how CoinLab’s model works: a gamer downloads a mining client for in-game currency (think Linden dollars, Wurm silver, WoW gold, FarmCash), similar to what any bitcoin user downloads as a way to gain virtual money. Then the software generates a certain number of bitcoins, which are changed into US dollars at current exchange rates. Next, CoinLab takes a cut of those real-world American dollars, as does the game company, which are then converted into the in-game currency.

"[We think] this will generate 50 times average revenue per user compared to advertisements," Peter Vessenes, CoinLab’s CEO, told Ars on Wednesday.

Vessenes added that the plan is to make all the steps in between the mining software and receiving in-game currency as seamless as possible. Gamers won’t need to know anything about Bitcoin; they’ll just have to run the client and then eventually will get a little boost in their gaming accounts.

Vessenes added that for now, the company has Wurm Online and graFighters "ready to go" when the service launches next month.

Still, not everyone is convinced that this is a good investment.

"Frankly, it makes no sense to me. But that doesn't mean its wrong, just that it makes no sense to me." wrote Ronald J. Mann, a law professor at Columbia University and an expert in payment systems, in a Wednesday e-mail sent to Ars. "The idea that they're going to get a VC-like return in bitcoin-based projects [is ludicrous]."

UPDATE: Joel Yarmon, of Draper Associates, wrote Ars on Friday to say: "The in-game revenue is a stepping stone: continue to build the business, trust, partnerships, etc. The greater idea of bitcoin is what attracted us to the investment: a decentralized monetary system backed by trusted parties, not venal governments, who want a secure and guaranteed way to settle remittances. You’ve probably seen an uptick in the value of art auctioned at Sotheby’s and Christy’s, and Utah just passing a law legalizing the settling of remittances in gold and silver. Folks are searching for more guaranteed ways of holding and moving money. Bitcoin can do that."

Cyrus Farivar
Cyrus is a Senior Tech Policy Reporter at Ars Technica, and is also a radio producer and author. His latest book, Habeas Data, about the legal cases over the last 50 years that have had an outsized impact on surveillance and privacy law in America, is due out in May 2018 from Melville House. He is based in Oakland, California. Emailcyrus.farivar@arstechnica.com//Twitter@cfarivar

34 Reader Comments

So if I understand this correctly, the software mines fake money (BitCoins), exchanges the BitCoins for real money (USD), then uses the USD to buy fake money (WoW gold), while giving a portion of the proceeds to CoinLab, the developer outfit that wrote the mining software?

so they're causing other people's energy costs to go up for in-game currency. This is all seamless, meaning the people have no idea their energy costs will go up and are profiting CoinLab. Kind of funny.

A few comments: gamers will opt in by downloading a client, so they won't have this forced on them.

As far as energy costs, different people's energy costs vary quite a lot. While it might make sense to turn energy costs directly into in-game currency even at a loss for some people, we wouldn't pursue the model if it were only taking advantage of an externality or free-rider situation.

It is very, very rare that bitcoin mining value has not exceeded energy costs (again, I speak broadly here, energy costs vary a lot) in the last few years. Typically what has happened is that if value does drop below (due to external exchange rate moves), difficulty changes (this is lagged up to two or so weeks), and keeps adjusting until miners are incentivized to start mining again, either because difficulty drops, or because the rate moves back up.

Gamers will generate value they are excited about in exchange for doing this, or they'll stop, it's simple. Game companies will get paid, so we'll be supporting indie game devs who are having trouble monetizing. This seems like a win to us.

A few comments: gamers will opt in by downloading a client, so they won't have this forced on them.

As far as energy costs, different people's energy costs vary quite a lot. While it might make sense to turn energy costs directly into in-game currency even at a loss for some people, we wouldn't pursue the model if it were only taking advantage of an externality or free-rider situation.

It is very, very rare that bitcoin mining value has not exceeded energy costs (again, I speak broadly here, energy costs vary a lot) in the last few years. Typically what has happened is that if value does drop below (due to external exchange rate moves), difficulty changes (this is lagged up to two or so weeks), and keeps adjusting until miners are incentivized to start mining again, either because difficulty drops, or because the rate moves back up.

Gamers will generate value they are excited about in exchange for doing this, or they'll stop, it's simple. Game companies will get paid, so we'll be supporting indie game devs who are having trouble monetizing. This seems like a win to us.

A few comments: gamers will opt in by downloading a client, so they won't have this forced on them.

As far as energy costs, different people's energy costs vary quite a lot. While it might make sense to turn energy costs directly into in-game currency even at a loss for some people, we wouldn't pursue the model if it were only taking advantage of an externality or free-rider situation.

It is very, very rare that bitcoin mining value has not exceeded energy costs (again, I speak broadly here, energy costs vary a lot) in the last few years. Typically what has happened is that if value does drop below (due to external exchange rate moves), difficulty changes (this is lagged up to two or so weeks), and keeps adjusting until miners are incentivized to start mining again, either because difficulty drops, or because the rate moves back up.

Gamers will generate value they are excited about in exchange for doing this, or they'll stop, it's simple. Game companies will get paid, so we'll be supporting indie game devs who are having trouble monetizing. This seems like a win to us.

As someone who used an ATI Radeon 5830 card to mine last year, I had to use software to overclock the GPU and run it 24/7 and even then I didn't make that many bitcoins. In terms of costs of the graphics card to output - the 5830 is very popular. I didn't realise this until I had bought it so it was just luck and so I decided to give mining a shot to see what I could achieve. Even after months, the most I made was like about 8BTC in total by running it 24/7 using a mining pool. When I wasn't using the PC, it maxed out and when I did use it, it sort of shared resources so the mining was lowered to compensate for everything else - browsing, Photoshop, videos etc.

For this to be of benefit, people really need the top end cards - and those do use up a lot of energy, however their purchase cost to output ratio aren't necessarily the best. Dual/triple/quadruple card setups are even better but they obviously consume even more energy.

Also bear in mind that because of how bitcoin mining is done, Nvidia cards are practically useless and generate an extremely low amount of bitcoins. So the only people who will even have this as an option are ATI card users.

On a side note, I find it funny how ATI are making such a huge loss when I assumed the popularity of bitcoin would have given them a much needed boost. AMD/ATI pretty much rule the bitcoin community since Nvdia cards are useless. You would think they would take advantage of this and do dual GPU or multi-card deals or even try and make specific cards that work in bitcoins favour and target and sell them towards miners. Missed opportunity if you ask me. Has anybody told AMD about bitcoins? /s

Has anyone done the math on bitcoin mining costs? Is it even remotely profitable when taking into account hardware and power costs?

Every time a new coin is generated, it gets less profitable. Eventually the math will be so hard it will cost billions of dollars in electricity to generate a single bit coin (of course, people will probably stop trying before it gets quite that hard).

Right now, it is profitable. How profitable depends on how efficient your CPU (or GPU) is.

Basically there are a fixed number of possible coins (that's how the math works), and it's impossible to actually "create" more coins. However nobody knows what the coins are yet, we have to find them first. Whoever finds the coin first gets to keep it (once they prove that they found it first). When there's only a few coins left it will be really hard to find them.

So... at least bitcoins are limited in number and should not be hit by rampant inflation caused by a sudden glut. However, they're still 'paper tigers' in that their value is entirely limited to what people will pay for them.

Question: Did anyone ever put up some real world currency/object or thing of worth for their initial value to be held against or is the last person holding bitcoins going to find them entirely worthless?

Not meaning to sound quite so negative as the above probably looks, but are the nnumbers generated to 'mine' bitcoins doing any useful work (and a strong apology if it is but that wasn't the impression I have from previous articles on bitcoin)? I like the idea of a purely electronic currency but some kind of real-world anchor (and presumably usefulness) would be good. Bitcoin based on the protein folding/seti@home type systems where real world corporations (or individuals) pay a certain amount for access to the processing time, this could be converterd into a commodity eg. 1 coin = 0.1g of gold in the real world - said virtual currency is then distributed to the people who provided the machines (minus the admin cut). The currency could still float/trade but could also be cashed out at any time into real world currency, whether you had a buyer or not, thereby guaranteeing a minimum value.Okay, you'd lose the anonymity fo the transactions aspect if/when you cashed out, but for virtual currency only transactions, it would be able to work in a similar manner to bitcoin, only with a guaranteed min value and providing access to usable computing power.

This article is ill-researched and written in a confusing way. Please try to explain the actual setup, maybe a summary of how bitcoin works, and leave the opinionated first paragraph out.

What other information should be provided for you on this free opinionated tech news site? If you don't know what Bitcoins are, Google it. If you do know then be quiet, start your own tech site and write a better article.

Opinionated first paragraph? Do you mean the first sentence? Other than stating the currency is having a "rough patch" he seems to be stating fact and backing it up with links!

Has anyone done the math on bitcoin mining costs? Is it even remotely profitable when taking into account hardware and power costs?

Every time a new coin is generated, it gets less profitable. Eventually the math will be so hard it will cost billions of dollars in electricity to generate a single bit coin (of course, people will probably stop trying before it gets quite that hard).

Right now, it is profitable. How profitable depends on how efficient your CPU (or GPU) is.

Basically there are a fixed number of possible coins (that's how the math works), and it's impossible to actually "create" more coins. However nobody knows what the coins are yet, we have to find them first. Whoever finds the coin first gets to keep it (once they prove that they found it first). When there's only a few coins left it will be really hard to find them.

That’s not how Bitcoin difficulty works. There is not a constantly increasing difficulty. Bitcoin mining consists of performing work termed ‘solving blocks’. The target time to solve each block is 10 minutes. As the number of miners changes the solution times change (more miners = faster solutions). Every two weeks the difficulty is adjusted to attempt to bring the average solution time back to 10 minutes.

Miners enter and exit the market for a variety of reasons including the current difficulty, the Bitcoin exchange rate or even the weather.

There seems to be a sort of equilibrium where mining returns less than electricity cost * 2 on dedicated miners. This will vary based on your electrical rate and the efficiency of your equipment. Gaming PCs not optimized for Bitcoin mining are likely to be closer to electricity costs * 1.25 or less depending on the video card. Non-gaming machines will likely be less than .25

Question: Did anyone ever put up some real world currency/object or thing of worth for their initial value to be held against or is the last person holding bitcoins going to find them entirely worthless?

Not meaning to sound quite so negative as the above probably looks, but are the nnumbers generated to 'mine' bitcoins doing any useful work ?

A. Definitively no thing of worth and last acceptor finds them worthless, and B yes or no depending upon what you value most. You could answer the second question with a yes only if you considered the properties of Bitcoins so essential (e.g. to enable people to purchase porn relatively anonymously) as to be worth more than the arguably mainly stolen electricity consumed not just in discovering them, but also based on your interest in a group of major players with a vested interest and a larger collection of botnets than your CPU capacity not being able to outvote you and others on what the network consensus about the valid next transaction ledger block is decided to be ( with 1 CPU == approximately 1 vote).

Sir, your negativity is entirely justified.

Declaration of interest: Bitcoins not accepted here because I value the health of the planet I live on more than anonymous porn and other dodgy purchases conducted using a system which suits the interests of crooks more than those of anyone else.

As for cost efficiency. I did some experimentation with this, not to make money but purely out of blind curiosity and from what I found, generally it wasn't at all profitable.

With a dedicated system I managed to make a fairly decent profit while with just my desktop, which I use for other things and is all the majority of people have, I made a whopping 18 cents in 12 hours, including the 6 hours it was on while I was asleep.

The most profitable Bitcoing mining rigs seem to be called botnets, where the miner clearly doesn't have to pay the electric bill of the zombies being farmed for this purpose.

At least my spam rejection load has gone down.

Sorry, but this is completely untrue. A profitable botnet would have to target only rigs with ATI GPUs, since CPU mining is utterly worthless, and most miners with these cards harden their sytems pretty thoroughly. Hardcore miners use LinuxCoin, which is a headless, gui-less distro that isn't vulnerable to normal botnet attacks (since it isn't based on Microsoft Windows). I take it you've never built a Bitcoin mining rig, amirite?

The most profitable Bitcoing mining rigs seem to be called botnets, where the miner clearly doesn't have to pay the electric bill of the zombies being farmed for this purpose.

At least my spam rejection load has gone down.

Sorry, but this is completely untrue. A profitable botnet would have to target only rigs with ATI GPUs, since CPU mining is utterly worthless, and most miners with these cards harden their sytems pretty thoroughly. Hardcore miners use LinuxCoin, which is a headless, gui-less distro that isn't vulnerable to normal botnet attacks (since it isn't based on Microsoft Windows). I take it you've never built a Bitcoin mining rig, amirite?

No he is right. Cost of the botnet is minimal upfront and since there is little ongoing cost its going to be cheaper even with very ugly effiencey numbers because well they are not the ones paying for the electricity, gpus, etc.

The most profitable Bitcoing mining rigs seem to be called botnets, where the miner clearly doesn't have to pay the electric bill of the zombies being farmed for this purpose.

At least my spam rejection load has gone down.

Sorry, but this is completely untrue. A profitable botnet would have to target only rigs with ATI GPUs, since CPU mining is utterly worthless, and most miners with these cards harden their sytems pretty thoroughly. Hardcore miners use LinuxCoin, which is a headless, gui-less distro that isn't vulnerable to normal botnet attacks (since it isn't based on Microsoft Windows). I take it you've never built a Bitcoin mining rig, amirite?

No he is right. Cost of the botnet is minimal upfront and since there is little ongoing cost its going to be cheaper even with very ugly effiencey numbers because well they are not the ones paying for the electricity, gpus, etc.

Okay then, you have convinced me. I guess I've been wasting my time with my minig rigs these past seven months. I've only generated about 125 BTC with this hardware.(which would convert to only about $646US at today's exchange rate). Tell me all about this wonderful botnet you've discovered that can generate more bitcoins than my GPU miners at zero cost and zero risk. How much BTC have you generated so far? How did you distribute the agent to the target computers? How long did it take you to find your first block? Do you have a URL where I can download this magical code? How about a URL where I can infect my Windows XP machines with your trojan and join them to your botnet?

The most profitable Bitcoing mining rigs seem to be called botnets, where the miner clearly doesn't have to pay the electric bill of the zombies being farmed for this purpose.

At least my spam rejection load has gone down.

Sorry, but this is completely untrue. A profitable botnet would have to target only rigs with ATI GPUs, since CPU mining is utterly worthless, and most miners with these cards harden their sytems pretty thoroughly. Hardcore miners use LinuxCoin, which is a headless, gui-less distro that isn't vulnerable to normal botnet attacks (since it isn't based on Microsoft Windows). I take it you've never built a Bitcoin mining rig, amirite?

No he is right. Cost of the botnet is minimal upfront and since there is little ongoing cost its going to be cheaper even with very ugly effiencey numbers because well they are not the ones paying for the electricity, gpus, etc.

Okay then, you have convinced me. I guess I've been wasting my time with my minig rigs these past seven months. I've only generated about 125 BTC with this hardware.(which would convert to only about $646US at today's exchange rate). Tell me all about this wonderful botnet you've discovered that can generate more bitcoins than my GPU miners at zero cost and zero risk. How much BTC have you generated so far? How did you distribute the agent to the target computers? How long did it take you to find your first block? Do you have a URL where I can download this magical code? How about a URL where I can infect my Windows XP machines with your trojan and join them to your botnet?

Sorry too busy looking for gold at the end of the rainbow on top of my unicorn to mine for bitcoins.

Tell me all about this wonderful botnet you've discovered that can generate more bitcoins than my GPU miners at zero cost and zero risk. How much BTC have you generated so far? How did you distribute the agent to the target computers? How long did it take you to find your first block? Do you have a URL where I can download this magical code? How about a URL where I can infect my Windows XP machines with your trojan and join them to your botnet?

It's easy enough to get your Windows XP machine to join a botnet. Just disable your antivirus subscription, have the patchlevel more than a few months old, and leave it connected to the net. Some of my students are researching the questions you ask and using honeypot XP virtual machines to capture botnet software for analysis, and they tend to report infection within about 24 hours. They have to slow the network connection right down after infection signatures they are monitoring for occur to avoid becoming part of the problem. But it's going to be the botnet operators who collect the Bitcoins and not the legitimate PC owners, and my understanding is that for the criminal operators to be avoiding risk involves going through a changing set of VPN proxies on compromised machines in different countries before carrying out command and control and data harvesting operations, e.g. to obtain banking passwords obtained from keyloggers or newly discovered Bitcoins etc.

Tell me all about this wonderful botnet you've discovered that can generate more bitcoins than my GPU miners at zero cost and zero risk. How much BTC have you generated so far? How did you distribute the agent to the target computers? How long did it take you to find your first block? Do you have a URL where I can download this magical code? How about a URL where I can infect my Windows XP machines with your trojan and join them to your botnet?

It's easy enough to get your Windows XP machine to join a botnet. Just disable your antivirus subscription, have the patchlevel more than a few months old, and leave it connected to the net. Some of my students are researching the questions you ask and using honeypot XP virtual machines to capture botnet software for analysis, and they tend to report infection within about 24 hours. They have to slow the network connection right down after infection signatures they are monitoring for occur to avoid becoming part of the problem. But it's going to be the botnet operators who collect the Bitcoins and not the legitimate PC owners, and my understanding is that for the criminal operators to be avoiding risk involves going through a changing set of VPN proxies on compromised machines in different countries before carrying out command and control and data harvesting operations, e.g. to obtain banking passwords obtained from keyloggers or newly discovered Bitcoins etc.

You misunderstood my question, as you seem to misunderstand how the Bitcoin P2P network operates. There are no "banking passwords" involved with bitcoin mining and there are no "banks" involved directly in the bitcoin economy. Banks are only useful if you are exchanging bitcoins for fiat currency through an exchange service. You can encrypt your bitcoin wallet with a passphrase, but no miner should ever have a bitcoin wallet running on the mining machine. Your bitcoin wallet should always be protected with encryption and backed up in multiple locations, and you should ideally keep multiple wallets, all with different balances that can be moved from one wallet to another.

I simply asked someone to identify the bitcoin botnet by name and explain how it is more profitable than the many BTC mining pools that exist all over the world that have mined all the bitcoins in existence. As I noted, I've been active in the Bitcoin community for most of the last year, and I've never heard of this magical botnet. These people may be referring to "stealthcoin," but that project is really only a proof of concept idea that probably wouldn't work in the real world, because the current bitcoin client no longer includes CPU mining as an option, since it would take years to generate a new block from CPU cycles, as opposed to hours or days with a normal GPU mining rig. If your students really have discovered a botnet that mines bitcoins with distributed CPU power, you should submit the discovery as a news story to Arstechnica or at the very least, announce it on the bitcointalk forums.

You misunderstood my question, as you seem to misunderstand how the Bitcoin P2P network operates. There are no "banking passwords" involved with bitcoin mining and there are no "banks" involved directly in the bitcoin economy. Banks are only useful if you are exchanging bitcoins for fiat currency through an exchange service. You can encrypt your bitcoin wallet with a passphrase, but no miner should ever have a bitcoin wallet running on the mining machine. Your bitcoin wallet should always be protected with encryption and backed up in multiple locations, and you should ideally keep multiple wallets, all with different balances that can be moved from one wallet to another.

I simply asked someone to identify the bitcoin botnet by name and explain how it is more profitable than the many BTC mining pools that exist all over the world that have mined all the bitcoins in existence. As I noted, I've been active in the Bitcoin community for most of the last year, and I've never heard of this magical botnet. These people may be referring to "stealthcoin," but that project is really only a proof of concept idea that probably wouldn't work in the real world, because the current bitcoin client no longer includes CPU mining as an option, since it would take years to generate a new block from CPU cycles, as opposed to hours or days with a normal GPU mining rig. If your students really have discovered a botnet that mines bitcoins with distributed CPU power, you should submit the discovery as a news story to Arstechnica or at the very least, announce it on the bitcointalk forums.

I never claimed there were banking passwords involved with Bitcoin so why throw this red herring into the discussion ? Did I claim Botnets were used _exclusively_ for Bitcoin mining ? Your involvement in Bitcoin for the last year implies to me declaration of a strong interest. Botnet herders have the same extractive interest in any financial network which they can manipulate and exploit. So why should the core operations of Bitcoin be immune from their interest ?

You also can observe this with any financial scam or bubble: those with the strongest interest invested in these always seem to be the most deluded in the way they perceive it, and have the least intention in having potentially recruitable outsiders seeing it the way it really is. So dies any pyramid operation - when its pretence can no longer be maintained. I said as much on the Bitcoin forum over a year ago and my comment was soon removed, so I see no further point discussing this on a forum owned and censored by the true believers.

Your question suggests either you seriously misunderstand the relationship of botnets to organised crime, which by its nature won't readily publish operational secrets, or that you are too heavily invested in the continuity of the Bitcoin network yourself to be willing to accept that Botnet distributed computations cost less to those who benefit but who don't themselves pay the electricity supply, network costs and hardware depreciation compared to networks whose operators do bear such costs, regardless of your other red herring concerning whether CPU or GPU hardware is involved. What does it matter if GPUs offer a speedup of 1000X, so long as a botnet computer costs less than 0.1% to the herder what it costs to the legitimate owner who pays the bills, besides which, what's to prevent botnets from dedicating PCs able to run GPU optimised bitcoin mining software on the proportion of compromised PCs so equipped ? All a dispassionate observer who understands the nature of criminal distributed computing needs to do here, to obtain a view with a high level of confidence is to follow the logic of the money.

What I do know with certainty is that most of the Botnets which used to be sending my email servers thousands of blockable spams a week are no longer doing this, presumably because they are doing something else. I'm also currently supervising a research student who has been capturing and testing Botnet software so I'm probably a bit more aware of their capabilities, economics and command and control capabilities than most.

It has also not escaped my notice that if you really do have the intimate knowledge of the operations and equipment owned and used by those who are discovering and issuing the proportion of new Bitcoins which you claim, then it clearly isn't the anonymous network which it's proposers make it out to be. Presumably you are also competing against other Bitcoin miners out there, in which case why on earth would they want to disclose their trade secrets to you ? From that point of view your GPU claim seems to me as dodgy a cover story as how WW2 RAF/USAF pilots when interrogated after capture claimed that their ability to see enemy aircraft in the dark was due to eating carrots, in order to avoid disclosing information leading to disclosure of the radar secret weapon. For a cover story to be believed, it has to have a scientific ring of truth to it.

I simply asked someone to identify the bitcoin botnet by name and explain how it is more profitable than the many BTC mining pools that exist all over the world that have mined all the bitcoins in existence.

The definitive reference my student has dug up in his literature review seems to be this one:http://blog.trendmicro.com/the-worm-tdl ... in-miners/ . The botnet whose code has been captured and analysed and demonstrated as mining Bitcoins is called TDL4 . The explanation of profitability has already been given in this thread.